IRS, Personal Taxes

Individual IRS Audit Rates Went Down in 2013, But . . .

The Kiplinger Tax Letter recently reported that 2013’s individual audit rates fell to 0.96% and are expected to fall further in 2014, due to budget restraints. (These are audits conducted in fiscal year 2013, not 2013 returns.) That probably can be considered good news, but . . .

• The IRS audited 10.85% of returns showing income of $1 million or more.
• 100% of business use of a vehicle on an individual return paints a red target on a return.
• Schedule C attracts attention, especially if it shows big meals, travel and entertainment deductions.
• A combination of a W-2 and a Schedule C with a loss can raise a hobby loss flag.
• Higher-than-average deductions may attract attention of the IRS, but should not be a problem if proper documentation exists.
• Tax return does not match 1099s and/or information returns? Expect a letter (correspondence audit) from the IRS.

Bottom line. Random audits may go down. Come up on the radar screen of the IRS and you’ll still get a chance to communicate with Uncle Sam.

Also, from Kiplinger: If you want to speak with a live person at the IRS, you have a 61% chance of doing so if you are willing to wait up to 20 minutes. Take it from me, the “hold music” is torture.

-VKM

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IRS, Just for Fun, Tax Court

Michael Jackson’s Estate Tax Liability – Dangerous Dollars

The executor of Michael Jackson’s estate and the IRS have rather divergent opinions of the value of his estate at the time of his death. Recent filings with the Tax Court reveal that the executor declared a value of $7 million. The IRS tells the Tax Court that the value is about $1.125 billion. This Tax Court case promises to be a Thriller.

We learned in August of 2013 that the estate was going to Tax Court with the IRS’ calculation of the estate tax and try to Beat It; we learned the particulars only a few days ago. A couple of the biggest differences of opinion are eye-popping. The estate valued the value of Jackson’s likeness at $2,105; the IRS says it was worth $434 million. (Heck, my likeness may be worth $2,105!) The estate valued the value of a music catalog comprised of works of Michael Jackson and of the Beatles (!) at zero; the IRS valued the catalog at $469 million.

The IRS says that the valuations by the estate were really Bad, so they have assessed the penalty for gross understatement. The total of taxes and penalty that the IRS wants is $702 million.

Valuation cases are never Black or White. This one will be very interesting to follow. If you are interested in the results of this conflict, You Are Not Alone.

-VKM

Personal Taxes

Don’t Tell Mrs. Maultsby

My wife is a very attractive, successful, intelligent, and well-respected attorney. Sometimes I’m sure she wonders why she married an uninteresting and undistinguished tax nerd. She puts up with my corny jokes, my slightly anal-retentive personality, my mechanical ineptitude and my other quirks. If she knew what it was really costing her, I might be just a distant memory.

While there have always been marriage tax penalties in the Internal Revenue Code, they were tempered a bit by the Bush tax cuts starting in 2001. These penalties returned in full force in 2013.

What penalties? To name a few, less than doubling of “filing single” amounts for:
• Tax brackets (For example, the top bracket for singles starts at $400,000 of taxable income; for married persons filing jointly the top bracket starts at $450,000.)
• AMT phaseout
• Capital loss deductions
• IRA deduction AGI limits
• Affordable Care Act taxes exemption ceilings
• Many tax credit limitations

I went to the marriage penalty calculator at taxpolicycenter.org and discovered that it’s costing Mrs. M (and me) about $30,000 in 2013 alone to share our wedded bliss. Now, if the lovely lady starts to be a bit more distant, or suggests that we divorce and shack up, I’ll know that one of you told her. I’m not saying anything!

VKM